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Are you checking that your investment returns are higher than inflation? If you're saving for a new car, home, or retirement, an investment return below inflation will make it difficult to achieve your financial goal. As a savvy investor, you need to be sure your investments return more than inflation! Here’s how.
Know how inflation affects investments
You’ve likely experienced inflation’s effect on everyday items like food and electricity. In January, you pay R500 for groceries, but by December, it’s R540! Electricity prices jumped 11.9% from September 2023 to September 2024, raising a bill of R500 to R560 in just 12 months! If your salary keeps up with inflation, you can still afford to buy groceries and keep the lights on, but if it doesn’t, you may need to cut back or find extra funds.
Inflation affects investments similarly. For instance, if you’re planning to buy a new car for cash in 3 years, and today’s price is R500,000, you set that amount as your goal. However, in three years, the car’s price might increase by 5% inflation to R578,000. Unless your investment returns 5% or more, you won’t achieve your goal of buying that new car for cash!
If you’re investing for retirement, inflation has an even greater impact. The lump sum you’re saving for, say R5 million, will ensure an income of around R20,000 per month in retirement, covering about 75% of your current salary. While this is sufficient for today’s expenses, inflation will reduce its value in 20 years, potentially covering only 60% of your future costs. To ensure your income covers all expenses in retirement, your investment needs to grow by at least inflation to approximately R13 million. This will provide an income that can buy the same items in 20 years as it does today.
Golden rule: Always invest to beat inflation!
Check that your investments beat inflation, after costs and taxes
You can find your investment return on your investment statements and compare it to inflation to see if you’re ahead! Investment managers typically provide statements at least once a year, ideally four times a year, and you should also have online access to your investment details, including returns, via a secure site.
Check inflation numbers on the Stats SA website—look for CPI (consumer price index, also known as inflation) on the ticker tape at the top of the page.
It’s also essential to check that your return beats inflation after costs, such as investment fees, which are listed on your statements.
For example, if your investment return is 10%, costs are 1.5%, and inflation is 5%, your net return after costs and inflation is 3.5%, meaning you are beating inflation! If your return is below 6.5% (inflation plus costs), you aren’t beating inflation, and you may need to save more to meet your goal or look for an investment that surpasses inflation.
Taxes, such as capital gains tax (CGT), may apply to investments and reduce returns further. These details are on your statement, or check with your financial adviser or tax practitioner for specific information.
Deciding where to invest to beat inflation
Investments such as unit trusts and Exchange Traded Funds (similar to unit trust funds and known as ETFs) come with objectives—the intended return of the investment. To beat inflation, you need an investment aiming to return more than inflation!
Historically, investments in equities or shares have the best record for beating inflation, while cash has the worst. Equities and shares carry higher risk than cash, meaning returns are not guaranteed and can vary widely over the years, such as 10% in one year and 4% in another. By staying invested, the returns tend to smooth out over time, allowing your investment to beat inflation. Diversified investments—including shares and asset classes like property, bonds, cash, and equities—have also historically beaten inflation while reducing risk.
Three questions to ask to make sure you invest for inflation-beating returns
- Has this investment consistently delivered inflation-beating returns in the past? Many investments may beat inflation in the short term, but you need consistent returns over many years.
- What are the costs associated with this investment, and how will they affect my return?
- How long should I keep this investment, say, 5 years or more, to give it the best chance of beating inflation?
Your financial adviser or investment manager can provide guidance on how long to remain invested to maximize returns. By staying invested, you can endure the low-return years and benefit from years with higher returns!
Top tip: Make sure that when you invest, you understand how much you can gain and lose, whether you can afford for an investment to lose money, and whether you can keep your money invested for the long term, as recommended by the investment manager.
Review your investments regularly
Even if you’re investing for the long term, review your investments at least once a year to monitor their performance. This is also when you can decide whether to change investments if you believe they’re underperforming. Changing or switching investments incurs costs and sometimes tax, such as capital gains tax (CGT), so be certain of the decision and its implications before switching.
Get financial advice
Investment decisions involve numerous considerations, including the economy, political factors, and investment strategies. It’s best to seek advice from a licensed financial adviser, who can help you identify investments that meet your goals while beating inflation and managing costs. Studies show that advised investors achieve returns up to 3% higher than those who invest without professional guidance!
Improve your investment skills
Whether or not you use a financial adviser, gaining investment knowledge is beneficial. Truth About Money, an initiative by 1Life Insurance, offers a free financial education course to help you learn about money management and investing. Apply today!
You can also follow financial news and podcasts daily. Sign up for investment newsletters, read blogs, and follow financial advisers and “finfluencers” on social media to quickly expand your knowledge.
Successful investing is a journey
Some of the most successful investors are older for a reason—investing is a journey. Over time, you’ll become more successful and knowledgeable about the investments that align with your goals. Partnering with an adviser or expert can accelerate your success, but you’ll also need patience to give long-term investments the time to achieve inflation-beating returns. Remember, all top investors have made mistakes at some point. They learned from them and continued growing, eventually beating inflation and achieving wealth. This can be your journey too!